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The Employee’s guide to settlement agreements – what you need to know

Introduction

As an employee, being presented with a settlement agreement to consider by your employer can be a daunting experience.

It is inevitable that issues surrounding employment relationships arise in the work place – employers may be discontented with an employee’s work performance or behaviour whilst employees may feel unhappy with the way they are being treated or the work they are being asked to do.

Such problems may be resolved through the use of performance management, informal and formal disciplinary or grievance procedures, workplace mediation or Acas conciliation.

Settlement agreements offer an alternative tool to deal with workplace problems. Most commonly they are used by employers to help end an employment relationship in a mutually acceptable way.

Here are some of the main questions to consider before making a decision whether to sign a settlement agreement or not:

What is a settlement agreement?

Settlement agreements, formerly known as compromise agreements, are documents which set out the terms and conditions agreed by those involved (employer and employee) when they agree to waive their right to bring a claim covered by the agreement – for example, the right to make a claim to an employment tribunal or court.

Each settlement agreement will vary depending on the particular circumstances but usually it will include clauses that deal with:

the particular claims to be settled

the financial payments you will receive and how they will be treated for tax

confidentiality

non-bad mouthing provisions

post termination restrictions

any agreed reference from your employer

Who can enter into settlement agreements?

Normally it is an employer and employee (or former employee) who are the contracting parties to a settlement agreement.

They can also be agreed between an employer and someone other than an employee (or former employee) who may be able to bring a claim to an employment tribunal – for example an unsuccessful job candidate complaining about discrimination or a worker with a claim for holiday pay.

A settlement agreement cannot be signed by groups of individuals.

What’s the difference between a settlement agreement and a compromise agreement?

The government renamed compromise agreements settlement agreements at the end of July 2013.

Whilst the nature and structure of the agreements themselves remains essentially the same, the new regime introduced an element of pre-termination negotiations – also known as a protected conversation.

Protected conversations are a way of encouraging employers to have full and frank conversations with employees about terminating their contracts. Anything that is said in this discussion is protected as being without prejudice and therefore cannot be used by either party against the other in the context of certain claims such as unfair dismissal.

There are exceptions: such conversations are not considered legally protected in discrimination, whistleblowing or other automatically unfair dismissal claims for example. This means that the negotiations can no longer be treated as being essentially ‘off the record’ if either party behaves improperly during the process. So, in these cases, what was said during the protected conversation could come out into the open.

For example, if an employer suggests to a pregnant woman that she might want to consider leaving their employment in return for a compensation package, such a conversation would not be protected if the employee believes that this offer has only been made because she is pregnant

What should I do first?

When you are invited into a meeting and asked to leave your job in return for signing a settlement agreement, it can be quite a shock. It can be hard to recall exactly what was said later on.

As soon as you can, write down as detailed a note as possible, setting out precisely what happened and what was said during the meeting. These contemporaneous notes can help you give accurate evidence in the event that you were to decide not to sign the settlement agreement in its original form and want to negotiate; or bring a claim against your employer in the event that an agreement cannot be reached.

Why do I need to take independent legal advice on a settlement agreement?

A settlement agreement will only become binding once you have received independent legal advice on its terms and effect from a solicitor or other qualifying adviser.

The adviser ought to provide you with a signed certificate to confirm they have provided this advice which you will need to give to your employer at the same time as you sign and return the agreement.

As well as advising you on the terms and effect of the settlement agreement, the adviser should consider with you whether you have any grounds for a claim against your employer. They should also discuss with you whether you are getting a good all round deal in the circumstances.

Who pays for the advice?

Under the terms of the settlement agreement, your employer usually to contribute an amount up to a certain level (typically between £350 and 500 + VAT) towards your legal fees for having to obtain independent legal advice regarding the meaning and effect of your settlement agreement.

Ordinarily therefore you will not have to pay anything towards your adviser’s fees, assuming you are happy with the terms of the settlement agreement being offered and do not wish to seek any amendments. The adviser will send their invoice for their professional legal services for payment directly by your employer as provided for in the settlement agreement. Provided that your employer honors their contractual obligation under the settlement agreement and pays the invoice there will be nothing for you to pay.

Where you are dissatisfied with the terms of the settlement agreement being offered and want your adviser to act on your behalf to try to negotiate an increased level of compensation typically you will be responsible for your adviser’s additional fees involved in your adviser carrying out this work on your behalf, unless your employer agrees to pay these. Typically also your adviser will try though to pass on their fees for carrying out such additional work to your employer if at all possible by seeking an increase to the employer’s costs contribution provided for in the settlement agreement.

How much ought my employer to be offering me?

In deciding how much money you ought to be offered, the following considerations are relevant:

what your contract of employment states regarding your financial entitlements such as remuneration, notice period and untaken paid annual leave. These need to be reflected in settlement agreement

your length of employment

your statutory redundancy entitlement

any enhanced redundancy pay scheme in place

any entitlement to bonus or commission

the length of time it may take to resolve the problem if a settlement is not reached

how difficult it would be for your employer to fill the post

how long it might take you to find another job

the reasons for offering a settlement

the possible liabilities and costs involved in dealing with any potential tribunal or court claim you may bring if a mutually agreeable settlement cannot be achieved.

Do I have to pay tax on the money I receive?

This will depend on the precise nature of the payment.

Ordinarily, any contractual payment made to you, such as salary, bonus and paid holiday entitlement will be subject to tax in the normal way. Any redundancy payment (whether statutory or enhanced), or payment genuinely representing compensation for loss of employment, injury to feelings or damages can be paid tax exempt up to a value of £30,000.

Separate specialist tax advice may need to be obtained in relation to this complex, technical area.

How much time should I be given to consider the settlement agreement?

You ought to be given a reasonable time to consider an offer of a settlement agreement. What is reasonable will depend on the circumstances of each case, including what both parties might agree is a reasonable time.

As a general rule, a minimum period of 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise.

The period of ten calendar days is a specific requirement outlined in the Acas Code of Practice on Settlement Agreements.

The failure to adhere to this timetable may mean that the settlement discussions can be referred to as evidence in a subsequent unfair dismissal claim before an employment tribunal.

It can be helpful to agree a timetable for discussions which allows parties time to take advice and to consider offers, whilst also avoiding any unnecessary delays.

Do I have to sign the settlement agreement?

The short answer to this question is no. Entering into a settlement agreement is something that is entirely voluntary – they include terms and conditions that are mutually agreed, and parties do not have to enter into them if they do not wish to do so.

Final agreement is often reached through a process of discussion and negotiation. You do not have to accept the terms initially offered – there may be scope for negotiation during which both sides make offers and counter offers.

Your adviser can also help you negotiate a better deal, which may include an increased financial pay-out.

If you believe you will be facing a period of unemployment, you will want to make sure you are able to meet your household living expenses until you find another job. One of the considerations you need to make is whether the money that’s being offered is enough in the circumstances.

Once both parties have signed the settlement agreement you have a binding contract meaning essentially there is no going back. This is why the legislation insists that you take independent legal advice.

If you do not sign the agreement, then you preserve your full rights to make a claim against your employer. You need to be mindful though there are strict time limits for bringing a tribunal claim if you do decide to do so.

iLaw – for specialist settlement agreement advice

If your employer has offered you a settlement agreement or you believe they are in the process of making such an offer then we can help. Please do get in touch with us here

Our focus is on meeting your particular needs – whether you are satisfied with what you are being offered financially and simply require standard advice regarding the terms and effect of your settlement agreement (formerly known as compromise agreements) you are obliged to take by law; or are looking for additional advice and assistance in order to try to negotiate an exit package with your employer on preferential, financial terms.

Key benefits of our service

Cost guarantee. We only charge the amount your employer is prepared to contribute towards your legal fees for reviewing the settlement agreement and providing advice as to its terms and effect.

We are fast and efficient. We appreciate time is of the essence when dealing with settlement agreements. We aim to provide same day appointments wherever possible, subject to availability.

We also endeavor to contact your employer immediately following on from our meeting with any amendments sought to the settlement agreement.

We understand what a difficult and stressful time it can be for you faced with being offered a settlement agreement and endeavor to provide reassurance and support every step of the way.

We act for clients in London and across the UK. We are conveniently located in the heart of London for clients working in the City and central London. For clients located outside of London we can provide advice via telephone or video conferencing such as Skype.

Contact us

Call us now on 0845 468 0082 for a FREE initial telephone consultation or e mail your enquiry to Julian Cox, Head of Employment at iLaw on julian.cox@ilaw.co.uk

1 thought on “The Employee’s guide to settlement agreements – what you need to know”

It’s interesting to learn that a settle agreement is something that can be used to when an employer and employee want to waive their right to bring a claim covered by the agreement to court. This is a lot for one to take in, but it’s good to know that one needs to write down what was said in the meeting as soon as possible so that there is accurate evidence. My husband believes that he might be receiving one of these soon, and we are wanting to make sure that we know a few things just in case.

Disclaimer

The content of this blog is intended for general information purposes only. The information and opinion expressed herein shall not be deemed to be and does not constitute legal advice. The author cannot accept responsibility for any loss as a result of acts of or omissions taken in respect of this blog.